Magazine

HCA Is Getting Its Strength Back

April 21, 2002

Jack O. Bovender is overhauling HCA Inc. (HCA) with a vengeance. In early 2001, when he was promoted to chief executive, the country's largest hospital chain was in deep trouble. HCA wasn't making much money, its reputation was shaky after it paid $750 million the year before to settle criminal and civil charges of Medicare-billing fraud, and its stock was floundering.

Bovender had a remedy for the first problem: challenge the health-maintenance organizations, which he said were pushing his company around. In Florida, for example, HMO giant Humana Inc. had wrangled discounts of up to 50% at HCA's 50 facilities. Bovender told Humana he wasn't going to take it any more. He threatened to turn away its 500,000 members in Florida if the HMO didn't renegotiate. "So be it if we lose business," Bovender said. "Let Humana butcher the hospital next door."

After eight months of often rancorous discussions, Humana finally gave in. It was an unprecedented victory, giving Bovender the power to wring higher prices from HMOs across the Sunbelt, and it marked a turning point in the company's health, if not the industry's.

But here's the rub: Investors still aren't terribly impressed. They fear that HCA's continuing legal problems--it faces two other civil complaints related to the billing dispute--could result in heavy fines. And investors worry that doctors remain alienated from the Nashville company, which in the 1990s tried to strong-arm physicians into using its hospitals. As a result, HCA's stock lags behind smaller rivals. The company's share price, $45, is 11% above what it was a year ago, while Tenet Healthcare Corp.'s (THC) has increased nearly 55% to about $70.

Nonetheless, HCA is back in the pink financially. Its earnings have risen over 20% in seven of the past eight quarters. Last year, HCA's revenue increased 7.7%, and its admissions were up 2.7%--growing faster than the industry as a whole. Better yet, HCA has reversed a decline in revenue garnered from every patient, a key industry benchmark. The figure rose 6.7% in 2001, compared with a 2.3% decline when Bovender came on as president in 1997. "Last year was the company's best performance in a decade," says Kemp Dolliver, a health-care analyst at SG Cowen. And now, for the first time in five years, the company plans a $3.2 billion expansion, which includes buying new facilities in Houston, Richmond, Va., and San Jose, Calif.

HCA's legal situation also took a turn for the better recently. The company had been unable to reach a settlement with the government over those two remaining civil cases, although it has agreed to pay a $250 million fine to cover administrative issues related to Medicare billing. On Mar. 22, a court overturned the 1998 Medicare-fraud convictions of two former HCA executives. The same charges that were behind the convictions--that the execs inappropriately billed Medicare--are central to the civil cases. Even before that, most analysts expected HCA to negotiate a fine in the range of $250 million to $400 million, an amount easily covered by its $600 million-plus quarterly cash flow. "No matter what happens, these final complaints won't derail us," Bovender vows.

Bovender is well-suited to lead HCA's turnaround. He worked for the company for 20 years, retiring as chief operating officer in 1994 when Columbia merged with HCA. Yet he's not tainted by the billing fraud, which occurred after his departure. That's why in 1997, Thomas F. Frist Jr., HCA's co-founder and chairman, who was then besieged by government regulators, begged his former lieutenant to return.

Bovender took a typically direct approach to reestablishing the company's moral code. In speech after speech, he asked employees to imagine what they would do if a fast-food clerk gave them a quarter too much in change: "No one knows but you, and it isn't illegal. Would you still return it?" In short, he made it clear that he expected the highest ethical standards from all of them.

Unethical behavior wasn't HCA's only problem. Its rapid growth in the 1990s had left it "like five independent companies jammed together," says Bovender. "There was no common culture, no common infrastructure." He quickly reversed course, spinning off or selling more than 100 facilities, fully one-third of the company. What Bovender kept were hospitals in the Sunbelt's wealthy suburbs. It was a strategy not unlike that pioneered by Tenet. "Imitation is the best form of flattery," says Tenet Vice-Chairman David L. Dennis.

The changes are paying off. Today, HCA runs the top hospitals in 16 of the country's 20 fastest-growing cities. "HCA is no longer trying to be the biggest--just the most profitable," says Steve Kapp, a principal at Maverick Capital, which owns 7.2 million shares. HCA has also benefited from demographics: For the first time in 20 years, hospital admissions are rising as baby boomers age. That growing demand has given hospitals renewed bargaining clout with insurers and HMOs.

HCA, though, is still operating with a significant liability--its uneasy relationship with doctors. Because nearly 90% of patients choose hospitals based on their doctor's recommendation, this is an important issue. The problem is that many physicians are still seething over HCA's behavior in the 1990s: It bought into medical practices, cut fees, and then tried to force out doctors who wouldn't use its hospitals exclusively. In New Orleans, for example, angry doctors fled HCA's Lakeside Hospital, once the city's top OB-GYN facility, for East Jefferson Medical Center, a nonprofit hospital. "Doctors have long memories," says Joe Purnell, executive vice-president and chief marketing officer at industry consultant Chamberlin Edmonds. "HCA's name is still blackened to many of them."